"LET'S MAKE A DEAL" -- better known as bartering -- is a way of doing business that predates the existence of currency. Here are some issues to consider before your company participates in a transaction.
There are two bartering categories. One consists of informal trade-offs like all of us made with our siblings or friends as children: "I will clean the porch, if you do the dishes." But when businesses do this, the action is tainted as "under the table," a trade of products or services that is conducted outside the sight of the tax collector. The other consists of formal barter arrangements through an organization registered with the Internal Revenue Service. The barter organization is an actual business that reports to the government all the transactions conducted among its clients. It is essentially a broker.
INFORMAL: Let's say your working spouse takes lessons from a nearby piano teacher and does gardening in return. Ideally, the teacher reports the market value of the gardening as income and the gardener reports the value of the lessons as income. In the real world, neither may bother to report the exchange.
When a business swaps services, it may skew the firm's financia results. For instance, a firm that has refurbished its building may register expenses that were paid "in kind," not in cash. If the IRS discovers a practice intended to evade taxes, the business will be hit with interest fees, late payment charges, severe penalties and possible criminal charges.
FORMAL: A legal alternative is to join a barter group. Some that operate in the region are Barter Systems Inc. in Silver Spring at (301) 565-5201, National Countertrade Corp. in Virginia at (800) 888-2730 and a new one in Baltimore, the Maryland Trade Exchange at 625-1868. There are approximately 300 of these groups across the country.
Some groups charge nothing to join but do assess a $10 to $15 monthly fee. Others want annual dues of $100 or demand a single life-time charge of $500. There are no credit checks in the application process, but you will need to submit a W-9 tax form that identifies your business tax number.
HOW IT WORKS: Suppose you need the services of an engineer. You must first call the barter service for a referral. Even if you know a certain engineering firm belongs to the group, you must go through the group to confirm that the firm will accept another barter client.
Once you settle on the engineering firm, you negotiate the price as you would in a non-barter transaction. The only rule is that the rate for the services can not be greater because the deal is in kind rather than in cash.
Keep in mind that tax rules apply just as they would for non-barter transactions.
Both parties sign a form for the work that is sent to the barter group. The engineering firm is then paid with a credit to its account for the value of the work. The firm can later draw from its account to buy goods or services from any barter member. In the meantime, your firm's account is reduced accordingly. If your account is insufficient, especially if you recently joined the system, then you must pay the difference in cash to the barter firm.
COSTS: The barter firm may require a cash fee to be paid by one or both parties. For example, if the buyer and seller each pay 5 percent of the market value, the barter firm makes 10 percent. (Note that not all barter firms require a fee from the seller.) If your company is in Baltimore and the engineering firm is elsewhere, both parties may also be charged an additional 1 percent.
If your trade account is "overdrawn," you will be charged interest on the outstanding amount, generally at a rate of 1 or 2 percent a month. If you are delinquent in the payments, you will face additional interest and penalties.
BENEFITS: Given the charges, why would a company join? The big feature is that there is no cash payment except for the fees. In addition, the barter system lets companies use their "slack time" so that employees who would otherwise have little to do are working to earn trade credits.
A major benefit is that the barter network gives you a built-in market. Your firm is listed in the membership book or a product-and-services directory issued to each participant. It would be wise to join a large barter group -- one with 70 to 100 members. In a small group it might be very difficult to spend your credits because of the limited choices.
Belonging to a barter group provides a certain quality control. Complaints about a member may cost it referrals or result in its ouster.
THE NEGATIVES: If your firm's workload utilizes nearly all of your employees' time, the added demand could stretch your company without producing revenues to increase the payroll. A manufacturer must consider the cost of raw materials, which could require an additional cash outlay.
SEVERING TIES: Leaving generally requires a 30-day notice prior to the renewal date of your annual membership. You get 90 days to spend accumulated credits.
THE BOTTOM LINE: If you join a barter group, pick one with a variety of industries represented.
Patrick Rossello, president of The Business Consulting Group Inc., is a member of a number of local advisory boards. His column appears on the first Monday of the month. Send questions or suggested topics to him c/o The Evening Sun, Money At Work, 501 N. Calvert St., Baltimore, Md. 21278.